Capital restructuring definition: The modification of a firm's capital structure either in response to changing business conditions or as a means to procure funding for the organization's growth initiatives.

Reasons for Capital Restructuring

Capital restructuring is a corporate operation aimed at changing the ratio of equity and debt in a firm's capital structure. It is usually done in response to a crisis such as:

  • Changing market conditions.
  • Hostile takeover bid.
  • Bankruptcy.

Before capital restructuring is implemented, the company must carefully analyze its liquidity and capital structure. This means that financial modeling, as well as financial statement valuation and analysis, are essential.

Benefits of Capital Restructuring

Capital restructuring is an operational approach primarily used to deal with changes that impact a business's financial stability. However, it can also be used to rearrange capital assets to position the company to take advantage of growth opportunities.

In essence, capital restructuring is done to change a company's holdings and finances. The goal is for the business to achieve its objectives while operating more efficiently.

Strong communication skills are a must since restructuring will require delicate negotiations with equity and debt holders in a bid to balance out their interests.

Increasing the Value of a Business

Capital restructuring can be compared to the process of repurposing or improving a home. To increase the value of a home and make it more appealing, homeowners usually make improvements and enhancements such as remodeling the house or repurposing the use of some rooms.

Capital restructuring works along the same lines to improve the finances and function of a business in a bid to make it more appealing to investors. If done properly, the restructuring can improve the business's reputation in the marketplace, prompting prospective, current, and former customers to consume more of its goods and services.

Causes of Capital Restructuring

Before embarking on capital restructuring, a business's owners or managers may want to make changes to improve the company's general prospects. In some cases, the restructuring may be triggered by economic changes such as the start of a recession or bankruptcy.

In economic-driven cases, a capital restructuring will focus on protecting and keeping the core of the business intact during the period of economic downturn. It does this by using some of its capital assets to offset operating expenses during this period.

On the other hand, capital restructuring may come as a result of positive economic changes that create a number of growth opportunities, prompting the rearrangement of assets to capitalize on new possibilities to increase the bottom line and reputation of the business.

Assessing the Current Capital Structure

Before undergoing capital restructuring, the business should assess its current capital structure to determine if there is truly a need for structural change. Once the reasons for making the change have been identified, it will be easier to see what changes should be made to reap the most benefits.

Like other business processes, capital restructuring requires great attention to detail, the ability to predict and understand market movements, and the capacity to use such information effectively.

A successful capital restructuring can:

  • Better position the business for growth.
  • Effectively support a company through slow periods.
  • Help maintain productivity through extremely adverse circumstances.

The major aim of restructuring is to significantly modify the current structure, operations, or debt of a company as a potential way to improve the business as a whole and eliminate or reduce financial harm.

Restructuring can be done in situations where a business has trouble paying its debts. Capital restructuring will help adjust and consolidate the terms of the debt, creating a way to settle its bondholders. The business does this by selling off its assets or cutting costs.

A business could also undertake capital restructuring as a way to prepare for a:

  • Merger.
  • Buyout.
  • Sale.
  • Transfer to an individual or corporate entity.
  • Change in business goals and direction.

When evaluating its business model, a company may find that there are products or services that do not generate enough revenue to cover debts and payroll. After agreeing with its creditors and shareholders, the company may decide to issue equity to:

  • Facilitate debt reduction.
  • Sell off its assets.
  • File for bankruptcy.
  • Restructure all financial arrangements.

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